Debtor-in-possession financing or DIP financing is a special form of financing provided for companies in financial distress, typically during restructuring under corporate bankruptcy law (such as Chapter 11 bankruptcy in the US or CCAA in Canada[1]). Usually, this debt is considered senior to all other debt, equity, and any other securities issued by a company[2] — violating any absolute priority rule by placing the new financing ahead of a company's existing debts for payment.[3]
DIP financing may be used to keep a business operating until it can be sold as a going concern,[4] if this is likely to provide a greater return to creditors than the firm's closure and a liquidation of assets. It may also give a troubled company a new start, albeit under strict conditions. In this case, "debtor in possession" financing refers to debt incurred while in bankruptcy, and "exit financing" is debt incurred upon emerging from reorganisation under bankruptcy law.[5]
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The Stoler Report: Specialty Lending For Commercial Real Estate
Transcription
♪♪[THEME MUSIC]♪♪ MICHAEL STOLER: Everybody is looking to buy real estate today. People are very interested in it. But you know there's banks, then I was talking a couple weeks ago on my show about crowdfunding, EB-5's and then there's what we would call a specialty lenders, people who could do short term lending, unique type of lending and a variety of other types of financing. So today I've assembled a group of specialty lenders to provide their insight on the markets today. We have Thanh Bui who is the managing director and one of the partners at Clarion Partners. Gregg Winter who is the co-founder and C.E.O. of the W Financial Fund. Ronnie Levine who's the senior managing director at Meridian Capital. Josh Zegen who is the co-founder and managing member at Madison Realty Capital and last but not least Mark Mendelsohn who's the co-founder at the Bluestone Group. So what would you call yourself, a mezz lender or? THANH BUI: We do primarily mezz lending. MICHAEL STOLER: And for my audience, explain what mezz is, you know because we don't like, we like inside baseball to be brought up. THANH BUI: Sure, it's the subordinate piece or the piece right behind the senior loan, so we're sandwiched in between the senior loan and the equities, ending at about say eighty percent loan to value MICHAEL STOLER: And what type of assets in the real estate world do you like? You know, is there five core assets? THANH BUI: We like cash paying assets, any and all but mostly office, retail, multifamily, industrial, hotels. MICHAEL STOLER: Now you bring up an interesting subject, you like cash paying assets. So we're talking about real estate that's in business, no transition as opposed to you, you do a variety of things, both of you do non-cash assets what's, what's your favorite, today you're favorite type of asset to finance? JOSH ZEGEN: I mean we finance multi-office, retail, industrial and hotel but I would say probably about forty to fifty percent of what we do has a multifamily component to it, but you know we're a special situation lender in general, typically focused on the middle market and our average deal size is between I'd say ten and fifteen million dollars. So that's been an area that we focused on which is I would say larger than the family office but lower than some of the big (IND). MICHAEL STOLER: But we were saying over here from Clarion. They want cash flow, they want to make sure that there's cash being paid, you from what I'm hearing you can accrue, you know. JOSH ZEGEN: We're a basis driven investor so that's really the most important thing from our standpoint, we typically like to be about 65% of underlying real estate value and we're also an owner and developer so we really understand it from the underlying real estate side and we're not constrained by debt service coverage or things like that, it's really a price point where do we want to be on a specific asset. MICHAEL STOLER: And Marc what would you say, how would you categorize yourself on the Bluestone Capital which is more, as opposed to the (IND). MARC MENDELSOHN: We're more in the one to ten range on the loans, it gives us a little bit of an advantage because it's not just people who need short term or other situations that a lot of lenders who just don't do loans that small and complicates a lot of things for a lot of people, you know borrowers, so we'll do those loans and we're really New York based you know New York City based even I would say, we'll do any asset type literally in New York City because that's. You know we're also you know owners and developers so we really understand the value and will lend based on value, that service really is not an issue for us we can either create an interest reserve that will cover the loan upfront or we'll accrue. You know we have no issue with the accruing payments and back ending the entire pay off. MICHAEL STOLER: Gregg? GREGG WINTER: W Financial is purely a lender. We're not also owners at this point of the real estate and I would say we're involved in the value creation stage. Guys who are buying mostly mixed use and multifamily buildings where there's going to be a value add that occurs rapidly after. MICHAEL STOLER: You know this is a big discussion that everyone always brings out and you know anyone who wants to bring it up and answer would be the key. What do we consider a value add and how do we value add, because you're making loans to make these properties value added. What for my viewers what is value add? JOSH ZEGEN: It's really creating additional value through, whether it's tenant buyouts, whether it's releasing, whether it's construction, whether it's you know air right purchases, there's always some additional value created in the business plan which is really you know in many ways you're banking on the operator to execute. In a lot of deals that we do, we don't typically you know we're lending on an as is basis and then there's the value add component where we're traditionally giving good news money on, so we really look at it from an as is, in an as sort of stabilized kind of basis. MICHAEL STOLER: I mean many people come directly to Josh or you know or to Gregg or to Marc but in many instances the customer comes to you and says where should I go. How do you make the determination of whose the value add? How do you make the determination if you should go to Clarion or another mezz lender in your position? RONNIE LEVINE: Sure I mean we close loans with probably well over a hundred lenders in any given year so you know we have a you know a very good understanding of who's looking to do what and what the proper fit would be. I mean we would look at the transaction and determine first of all what's the timing how quickly does it need to close, you know how much equity does the sponsor have available to put into the project, are they looking to leverage 60%, 70%, 80%. So really you know the first thing we do is try to understand the business plan and the needs of the client and then you know we know the right, we know the right fit generally for what they're looking for so I think the key is really understand their needs and then marry them up with the proper source of capital. MICHAEL STOLER: You know you raise your money through institutional investors. Josh raises his money through institutional. Greg raises his money more from family offices and high net worth individuals. And you raise your money through individuals high net worth situations. When you're doing a loan how do you, you know you're, the important situation of the transaction is the timing, to get it done. You know that's why people, you know to go to a bank you have a certain time period that takes and you know it's a different case. How fast can you turn over a loan in case somebody has a good piece of property or something over there? JOSH ZEGEN: Well you know if it's something in the New York metro area typically And we've done literally billions of dollars of deals in this area, so we typically know the market so well that it could be as soon as a few days but you know that's not the average the average is typically I would say two to three weeks. MICHAEL STOLER: Gregg? GREGG WINTER: I would say you know my partner David (IND) and our senior loan officer Gerard (SP) (IND) really specialize in that, in the New York type of phenomenon where contracts are time of the essence, there are very short closing time frames, especially if you're going to be able to negotiate favorable terms on a purchase. David just sent out an e-mail today regarding a seventeen million dollar loan that we closed in literally less than two days from the time the term sheet was signed, it was a development site in Flushing being purchased for fifty three million dollars so there was plenty of actual equity going into the deal and they had spoken to the borrower. MICHAEL STOLER: When I hear something like that I mean it's great that one can turn over a transaction in a period of time but there are always moving parts you know there are title insurance questions, there's environmental situations that could be around there. How do you, all of you, how do you get comfort that something doesn't show up that could blow up that transaction? GREGG WINTER: We did a lot quickly, I mean on that point. THANH BUI: We, because our capital is institution in our investment structures and strategies are very institutional, we always hire third parties and those third parties can take two to three weeks on average really a deal closes anywhere between thirty to forty five days if it's under contract by the borrower and such. And so, also as a mezz lender we also do value added transactions as well. And those take a little bit longer because you really have to investigate the business plan of the borrower and make sure that it works and such and so on average we can do this as quickly as thirty days but again waiting for third parties and such that takes a little bit of time as well. Clarion is an owner and operator of eleven hundred properties nationally. So if there is a property that we have lost for example because we are bidding it as well but it went another direction and we're lending on that property, we probably have a lot more insight into that asset just because we ran it through the process as an equity owner and potential purchaser, that cuts down on the due diligence time as well. RONNIE LEVINE: I'll also say Michael, normally if you're closing a loan in two days something happened. THANH BUI: Right. RONNIE LEVINE: Meaning that there was probably another loan that fell out. So normally what happens, and we've closed several loans with W literally in less than a week so that's not an aberration. I mean I don't think that they're looking to advertise we close in three days but we've done several. But normally what happens is a lender fell out of bed, so you're inheriting the third party reports you're usually coming to them with you know an engineering, environmental report that was done for previous lender, there may be an appraisal that can be leveraged so they're getting, you know they're not starting from a blank piece of paper and closing in two days. Cause if you think about it there would be no reason to close a loan in two days, I mean any, even in New York the fast paced people go hard and they got to close in thirty days, I mean so there's normally a little bit more runway. So if you're closing in two days it's generally a situation where something else fell out of bed. MICHAEL STOLER: How do people find out about the world of specialty lending? You know we were talking in the, in the crowdfunding show that there are probably a hundred crowdfunding companies who have just been created and they're all relatively less than two years old and some of them you know they're advertising or somebody you Google the company and says short term interim lenders or something like that I mean is their advertising, is it do you do Google ads, do you have social media? I mean how important is that phenomenon which is very important in the crowd funding mechanism have an effect on your type of business today? JOSH ZEGEN: Well I think you know when we first started ten years ago it's a huge you know component to it, a lot of advertising, after being in business for ten years a lot of it is the fact that we provide the certainty of execution for so many years. People know, know about you know who we are they know where to find us for this type of deal. But we do do a lot of marketing, advertising, brokers, attorneys, you know direct borrowers, direct developers, a lot of repeat transactions with specific borrowers as well. MICHAEL STOLER: Marc? MARC MENDELSOHN: We're mostly referral based, a lot of the attorneys that we deal with in all different aspects bring us a lot of those deals, brokers, you know people in general in will know us in the industry that we do the lending, they'll come to us directly. You know we haven't done much if any advertising. GREGG WINTER: Our fund is almost twelve years old so like Josh is saying there's a lot of repeat business. There's a lot of word of mouth from attorneys accountants, of course developers, owners. The word gets out that you can execute and there is certainty of execution. I think that's the most important thing. THANH BUI: Yeah I would echo that, Clarion Partners has been around for thirty two years and my business partner (IND) and I have been in mezz space for 16-17 years so there's a lot of experience and surety of execution and so the broker community knows that as well as the buying community. MICHAEL STOLER: One of the things besides the crowdfunding that I brought up you know today we have the mortgage REITs, who are out there you know you know, the Starwood, the Annaly, you know and others. How active are these publicly held companies who you know have, they have to answer to the stock, to the S.E.C. are they active in the specialty interim quick lending business running? RONNIE LEVINE: They're very active I mean you've got, you know North Stars of the world and there's a lot of, there's a lot of finance companies that we'll call them, some of them REIT structure some of the more you know finance company structure but you know generally what's differentiating I think the crew here is how low they'll go down, how small they'll go on loan size. A lot of the lenders that you're talking about Star Woods of the world and North Star and Annaly, they're not looking at generally loans less than twenty million dollars and they usually are not closing in the timeframes, I mean they're probably more in the in the thirty day, they need thirty days generally speaking but they can move fast, there's exceptions but I mean really the differentiator is the speed and also the loan size, they're generally not playing on the real small end of the spectrum. JOSH ZEGEN: I've also found, I was just going to say that you know the minimum interest period that someone like that demands is typically a lot longer. MICHAEL STOLER: For my viewers explain the traditional structure of a loan. Let's say hypothetically the banks really aren't interested in this (IND) construction loan or something, how you would structure a loan and how you know the interest reserves and so on. JOSH ZEGEN: You know one example we did a deal in Williamsburg where someone bought a piece of property for thirty five million dollars we provided eighteen million dollars on a land loan at the time and the borrower started funding the project out of cash to get things moving. Recently they came back to us for an eighty million dollar construction loan and we're providing that, you know we're far down the line, plans approved, everything's been done, they've been moving. So that's sort of like the type of deal that we do. Now, why does someone come to us for that deal well traditional banks are really a pullback in middle market construction lending and we found that that's a big you know opportunity for someone like ourselves today and just given the regulatory you know environment. MICHAEL STOLER: Now what do you, how long of a loan is it and do you structure reserving for the interest and guarantees and other? JOSH ZEGEN: So in that particular case we had a partial guarantee. It was a two year loan with an extension option and we are reserving for part of the interest there. Obviously they have to hit specific milestones to continue having advancements of funds but that's, you know that's the way we structure that commitment. MICHAEL STOLER: Are you doing construction also Gregg? GREGG WINTER: We're, we rarely do ground up construction we've done a couple of them. Much more typical for us would be a rehab kind of a loan, which again plays into the whole theme of value added properties. So for us typically the rate would be between say nine and a half and ten and a half percent, with two points for a one year interest only loan. Typically there's a six month minimum for interest and we'll hold back reserves for various things it could be a Cap Ex reserve, it could be an interest reserve either full or partial interest reserve or a tenant buy out reserve so that we know there's no guesswork about knowing that the project is adequately capitalized. MICHAEL STOLER: Marc? MARC MENDELSOHN: We're very similar, we'll do more rehab rather than ground up. We've done a very similar loan to what Josh just said but a much lower scale, you know the guy bought a building for a million dollars in the Bushwick area and it's become a very (IND) neighborhood, six family, gut renovating the property in the four-five hundred thousand dollar construction budget and just the constriction of a construction loan from a regular lender to do a small deal like that with draws and the reporting prohibits the timing of it and their in and out in a year. So they'll come to us, we'll put up the, you know the million dollars, put two hundred thousand in reserve. They need fifty grand they'll call us, we just finished the kitchens, we just finished the floors we'll release the fifty, we'll go down there we'll look at it. We're more fluid that way and more entrepreneurial in that sense. MICHAEL STOLER: As an institutional lender that's not really your market. THANH BUI: We actually do do selectively ground up, depending on the market and the product type. We do value added as well but as a mezz lender we definitely build in an interest reserve. So the senior lender, which is typically a bank in this instance would leave off at about 60-65% and we'd take it to maybe 75 or so 80% loan to cost and obviously once they add the value that L.T.V. comes down. But building in an interest reserve to help us through kind of the transition period. RONNIE LEVINE: You know I mean you know in that structure where mezz is coming into a constructional loan, I mean you know where we get involved and try to help our client structure these deals is you know are you funding all of your mezz first, or are you going to fund (IND) with the senior loan and these are all kind of the nuances in structure that really make a difference. THANH BUI: Yeah I mean from your borrowers perspective it's better to have the mezz go in or the opposite in a way, but the banks typically want the mezz to go in for. RONNIE LEVINE: Right so we've been successful in structuring where the bank will allow the mezz lender to fund (IND), which is you know lowers the cost of capital to the borrower on a blended basis. And I think on more the specialty finance construction deals there's no, you know there's no set formula I think every one of these guys probably structures there's deals a little bit differently, but from the brokerage perspective what we look for is you know when you say a holdback is that funded at closing and they're paying interest on their future draws or are you funding them in the future. GREGG WINTER: Typically, yeah it's funded at close. MARC MENDELSOHN: It's funded into an escrow. RONNIE LEVINE: Right so I know that you have the ability to potentially fund draws, you know that's really where the nuances come in are you paying interest on all the loan dollars day one, are you funding them over time and you know so we'll work with the client to run the math on the different structures and figure out you know what is what's the best structure. MICHAEL STOLER: I hear other emerging neighborhoods and you know there are different asset classes and we were talking prior to the show that certain people are a little worried about certain asset classes because they don't, you know like hospitality is a great asset class but it's an operating business. It's you know, it's not multifamily that people you have a vacancy of four percent in the country because of that. How do you look at different type of assets in different worlds, I mean you know retail is always you know you have retail, you have industrial, you have the office and so on. Which asset is your favorite and which ones you're, one that you're most cautious about. THANH BUI: Well I guess it depends on what your strategy is too, if you're building ground up multi families right now in the outer boroughs makes a lot of sense. It may not make sense in Arizona for example. MICHAEL STOLER: I'm talking more in our local geographics. THANH BUI: Sure. So multifamily in the outer boroughs obviously makes a lot of sense. Clarion just bought a property in Williamsburg for example multifamily. We have a research group and our research group takes a look at the various property types all over the U.S. And you know multifamily if you hear a lot about overbuilding and such, it's still actually in check in most major markets so that's an asset class that we really like a lot. You don't see a lot of office construction clearly in in the New York market place, but industrial is also an asset class that we really like in the region as well. RONNIE LEVINE: I mean there's clearly the most liquidity for multi-family, I mean certainly in this market. I think the large construction loan that you guys are doing it's a great location, a great asset but I think the reason that we're probably with you as opposed to more conventional lenders is because it's primarily a hotel. So hospitality is one of the sectors in the market that there's not a lot of liquidity for us. So I think that's where you, you have a great opportunity to put out a safe loan and get a nice rate of return. MICHAEL STOLER: But as I just brought up before hospitality is an operating businesses, it's like you know one of the businesses whenever I do a show in the restaurant business I ask the restaurant owners which banks lend you money they said no, the answer is simple none, you know because it's you know it's a very violent industry, you know too many of them fail over the year. Hotels right now it's fine because business is doing well, but one of the biggest negatives to the hospitality business in New York and around the country is Air B&B, because they are creating additional rooms and they are having an effect on the on the occupancy and the daily rate. GREGG WINTER: Well they're like Amazon to the retail business, the same basic thing. So I mean in our in our case also we shy away really from doing much with hotels, anything with an operating business inside and we really focus on the mixed use, the multifamily and also retail to a lesser degree. Some of the things we've done together were retail. RONNIE LEVINE: Sure, look I mean in New York when you have a vacancy in retail you as opposed to other markets in the country, I mean there's a pretty good certainty you can peg within a pretty tight range what the rent will be and kind of how quickly that's going to stay vacant. MICHAEL STOLER: We're seeing a large predominance today of health facilities. I mean there's blink! there's you know, Planet Fitness and all the rest, how do you look at this or how have lenders look at this with regard to that? Because you know the business model is very interesting because somebody who's paying twenty-thirty dollars a month really continue. And these places operate because it's my credit card. Now you also look at it it's a difficult operating business have you ever financed any in the health facilities or the luxury gyms? THANH BUI: We have not in our buildings. JOSH ZEGEN: So I mean we have not necessarily specific just a gym, but typically we're really, when we look at something like that we really think about the costs that are being put in by that gym, what you know can we use that for another gym that may go in. So you know how applicable would that be if we had to take over. MICHAEL STOLER: I've done shows on this, one of the new emerging trends in health care is the you know the City MD, you know the Urgent Care centers you know but it is a new trend it's around there you know, it's not proven but you know and it's a specialty because they have to build out. It's more, it's not only retail, it's a lot of plumbing it's a lot of office space and others have you have you looked at that type of market the health care market and the urgent care? JOSH ZEGEN: It's typically a great use because the hospitals are so backed up with emergency rooms so it's a just easier alternative and it drives other tenants around that kind of tenant so I mean that's a good trend if anything. RONNIE LEVINE: You know it's a viable business because they're actually taking pure retail space in a lot of locations and they could actually get into a community facility designation where there would be less competition I mean I've seen them on my block in you know right next to banks and you know on you know we have in our in the neighborhood on Third Avenue I mean there's a few of them. So they're paying retail rents where they could be in community facilities probably paying less. MICHAEL STOLER: Here's an interesting thing and I know you've been working on it Ronnie in number of places, the conversion of certain types of real estate which may have been hospitals in the past I think Josh you've done that. How do you look at the conversions of these type of things to residential today? JOSH ZEGEN: So I would say you know no one hospital kind of is the same. So a deal we did on Queens Boulevard happened to been a great property because it had lots of exposure, lots of windows, great light and air and it made for a great conversion given the layout. So like as a lender I'm really looking at that and saying well how well is this going to transform to you know a mixed use property and the value of that property is really driven by what, you know how many units, what you can do, how many bedrooms, what the renovations will look like and we really think about it from an owner's you know perspective when we're valuing the cost to complete a project like that. MICHAEL STOLER: You know there's been talk that the condo market is getting a little frothy in the New York area. How, have you any thoughts on this as a lender on new condos? GREGG WINTER: I mean in our case I'd say the majority of the value add deals that we do in Manhattan and most of them in Brooklyn, some of them in Queens are going to be rental buildings. In some cases the exit will be condo sales but where the kinds of loans that we are doing are not at the top of the market, they're not the three thousand dollar a square foot types of condos. MICHAEL STOLER: So I think you know 26 minutes, 28 minutes you get a lot of ideas and I think my viewers have got some good ideas on what's happening and alternatives of where to go and that there's money is out there. You know there's more money that's plentiful out there and I'd like to thank Thank, Gregg, Ronnie, Josh and Marc and I'll see you next week. ♪♪[THEME MUSIC]♪♪
Contents
Examples
Two notable examples are the government financing of Chrysler[6] and General Motors[7] during their respective 2009 bankruptcies.
American law vs. French law
The willingness of governments to allow lenders to place debtor-in-possession financing claims ahead of an insolvent company's existing debt varies; US bankruptcy law expressly allows this[8] while French law had long treated the practice as soutien abusif, requiring employees and state interests be paid first even if the end result was liquidation instead of corporate restructuring.[9]
See also
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References
- ^ Lyndon Maither, B.C. The Canada Income Tax Act: Enforcement, Collection, Prosecution, 4th Ed. Lyndon Maither. p. 319. ISBN 9781300772286.
- ^ Stuhl, S.A.; Vault (Firm) (2003). Vault Guide to Bankruptcy Law Careers. Vault Incorporated. p. 147. ISBN 9781581312577.
- ^ Liu, L. (2008). Subnational Insolvency: Cross-Country Experiences and Lessons. World Bank. p. 20.
- ^ Lyndon Maither, B.C. The Canada Income Tax Act: Enforcement, Collection, Prosecution, 6th Edition:.
- ^ Hecker, J.E.Z. (2006). Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms of Underlying Structural Issues. DIANE Publishing Company. p. 10. ISBN 9781422304327.
- ^ Engel, G.T. (2010). Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Year 2009 Financial Statements. DIANE Publishing Company. p. 61. ISBN 9781437926811.
- ^ Barofsky, N. (2011). Troubled Asset Relief Program (SIGTARP): Quarterly Report to Congress by the Office of the Special Inspector General (SIGTARP)(October 26, 2010). DIANE Publishing Company. p. 145. ISBN 9781437942019.
- ^ Warren, E. (2010). Use of TARP Funds in the Support and Reorganization of the Domestic Automotive Industry. DIANE Publishing Company. p. 44. ISBN 9781437923698.
- ^ Pomerleano, M.; Shaw, W.; Bank, W. (2005). Corporate Restructuring: Lessons from Experience. World Bank. p. 130. ISBN 9780821359280.
External links
- Calpine closes $5 billion DIP financing
- Bankruptcy basics - Operating capital
- 11 USC 364 - Obtaining credit
- Federal Rules of Bankruptcy Procedure - Rule 4001c: Obtaining Credit
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